Understanding the Chocolate Market

In the last year or so there has been a lot of discussion surrounding the cocoa markets, with two presidents in Ivory Coast and "Choc Finger" cornering the world bean market. Rather than breaking down the cost factors behind a market, it might be interesting to explore cocoa itself -- the basis for chocolate.

What Makes Up Chocolate?
Cocoa products are made from cocoa beans -- the kernels of the cocoa fruit. After they are gathered, the dried beans are cleaned and shelled, and the nib is roasted. These roasted nibs are ground to yield cocoa liquor (cocoa particles suspended in cocoa butter) produced from the high temperatures during grinding. The grinding process generates approximately 80kg cocoa liquor for every 100kg of cocoa beans. The cocoa liquor is then pressed to extract the cocoa butter, leaving behind a solid material called cocoa cake -- which is broken up and pulverized to form cocoa powder. 80kg of liquor will yield approximately 40kg of butter and 40kg of powder.

Types of Chocolate
Cocoa butter is combined with additional cocoa liquor to be processed into chocolate. Other ingredients are combined with the cocoa products to make different types of chocolate. For example:

The Marketplace
Nearly 70% of the world's crop is grown in West Africa. The Ivory Coast is the main producer (with approximately a third of the global crop) and exporter to the world market. Changes, or even rumors of potential changes, to Ivorian supply can affect global markets and sentiment. Other major producers are Indonesia (17%) and Ghana (15%).

Cocoa beans are either traded quickly as spots (or 'Cash' -- i.e. trading goods which are immediately available) or on the two futures markets: London and New York. Cocoa beans bought in the EU are almost entirely West African and the Indonesian crop is mainly sold in the US. Cocoa is a very sensitive market because of highly speculative elements in the futures markets. Due to the different sources and customer bases, the two futures markets are often unrelated.

Cocoa butter and cocoa powder are traded priced as a ratio of the cocoa bean price. This mechanism allows the sharing of risk between the buyer and seller, as the actual price will change in line with the variation in cocoa bean prices. These ratios usually remain stable while market factors affecting the cocoa market remain steady. These include supply and demand for cocoa beans, and also for cocoa butter and cocoa powder, as 'twin' products. Processors must sell the same amount of cocoa powder by-product as cocoa butter as the profitability of the operation depends on the prices of both products.

Market Movements
We are currently in an unusual market situation. Cocoa powder used to be the by-product of the cocoa grinding industry and cocoa butter used to rule the ratio. However in recent times, the demand for cocoa butter has been dipping as the effects of the economic crash of 2008 have affected the buying habits of consumers in wealthier, chocolate-buying nations. The differential between the two is also compounded by the recent increased demand for cocoa powder, especially in Asia.

The underlying trend behind all of this relates to percentage of cocoa derivatives in a finished food product. The cocoa butter and liquor content of chocolate bars start at around 21% and can increase dramatically the darker the chocolate gets. Can we now truly say that chocolate is becoming a luxury product? Or -- looking at the price levels -- is it a good time for new innovation into real chocolate products?